Swiss reprieve

ABB's $4-billion buyback camouflages still-tough future

ABB's $4 billion share buyback programme camouflages bleaker growth and profit perspectives. It also buys Ulrich Spiesshofer, the Swiss engineering giant's newish chief executive, time to adjust the group to a "new normal." The Zurich-based company has disappointed markets twice this year already with warnings on future profitability and subpar results. Problems in the power systems division, which has suffered costly setbacks in large projects, have been among the most pressing issues. ABB now concedes it may never get back to its high-flying ambitions of the past.

Spiesshofer, in charge since September 2013, has cut medium-term targets on revenue growth and the cash return on invested capital by about a quarter. That is likely to have a negative effect on earnings. Margin targets were also cut. The share buyback, accounting for 7.5 per cent of ABB's market capitalisation, will mitigate the pain for shareholders. As well as receiving the cash, the reduction in the number of shares issued means ABB can uphold its previous goal of increasing earnings per share by 10 to 15 per cent annually.

Though lower, ABB's new targets are still ambitious. The Swiss engineer aims to grow faster than the wider market and the overall economy. Meeting the goals requires a meticulous efficiency programme that emphasises organic growth, steady annual cost cuts and growing the margin-rich service part of the engineering business.

It also entails the most radical internal organisational rejig in a decade. Spiesshofer is stripping ABB's traditionally powerful regional divisions of influence. In strategic and operational terms, the group's five sectoral business units will call the shots. This step, which mirrors similar moves by Siemens CEO Joe Kaeser, is sensible and should streamline the group's decision-making. ABB needs high growth and margins to justify its premium valuation on the stock market. According to Thomson Reuters data, ABB trades at a forward price-earnings ratio of 16.4. The share price, however, has fallen seven per cent since early January. Over the last 12 months, they have underperformed arch-rivals Siemens and General Electric. The share buyback should keep investors quiet for now. Having won the reprieve, ABB now needs to achieve.